CORPORATE GOVERNANCE

ACCTG 216 : GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT

AND INTERNAL CONTROL
participation Rule of law transparency responsiveness

What is GOVERNANCE?

Consensus Equity and Effectiveness

accountability
oriented inclusiveness and efficiency
Corporate governance has a broad scope. It
includes both social and institutional aspects.
Corporate governance is the system by which
companies are directed and managed. It influences
how the objectives of the company are set and
achieved, how risk is monitored & assessed, & how
performance is optimized.

WHAT IS CORPORATE GOVERNANCE ?

Corporate governance is the system of principles,
policies, procedures, and clearly defined
responsibilities and accountabilities used by
stakeholders to overcome the conflicts of interest
inherent in the corporate form.

WHAT IS CORPORATE GOVERNANCE ?

Corporate governance is the interaction between
various participants (Shareholder, Board of Director
and Company Management) in shaping
corporation’s performance and the way it is
proceeding towards. Corporate governance deals
with determining ways to take effective strategic
decisions and developed added value to the
stakeholder

WHAT IS CORPORATE GOVERNANCE ?

1. Fair and equitable treatment of stakeholder.
2. Self- assessment
3. Increase shareholders’ wealth
4. Transparency and full disclosure

OBJECTIVES OF CORPORATE GOVERNANCE

1. Transparency and Full Disclosure
2. Accountability
3. Corporate Control

BASIC PRINCIPLES OF CORPORATE GOVERNANCE

CORPORATE GOVERNANCE APPROACHES
Rules- based
• Legal requirement (SarbOx)
• To protect shareholders from
fraudulent financial reporting.
Principle- based
• Best practices
• Comply or explain basis
• OECD (Organizations for
Economic Co- operation &
Development)
• ICGN (International Corporate
Governance Network
BEST PRACTICE

Strategy
1.50% of the board (NED) Scrutiny
Risk
People

2. Chairman & CEO - Separate

BEST PRACTICE

Audit
3. Board Subcommittees Nomination
Remuneration
Risk
WHY GOOD CORPORATE GOVERNANCE
IMPORTANT?

• Changing Ownership Structure

• Importance of Social Responsibility
• Growing Number of Scams
• Indifference on the part of Shareholders
• Globalization
• Takeovers and Mergers
 WHY THERE IS A NEED OF
CORPORATE GOVERNANCE?
Corporate Performance

Improved governance structures and processes ensure

quality decision-making, encourage effective succession
planning for senior management and enhance the long-
term prosperity of companies, independent of the type of
company and its sources of finance. This can be linked
with improved corporate performance- either in terms of
share price or profitability.
Enhanced Investor Trust

Investors consider corporate governance as important as

financial performance when evaluating companies for
investment. Investors who are provided with high levels of
disclosure and transparency are likely to invest openly in those
companies. The consulting firm McKinsey surveyed and
determined that global institutional investors are prepared to
pay a premium of up to 40 percent for shares in companies
with superior corporate governance practices. Better Access
to Global Market: Good corporate governance systems attract
investment from global investors, which subsequently leads to
greater efficiencies in the financial sector.
Combating Corruption

Companies that are transparent, and have sound system

that provide full disclosure of accounting and auditing
procedures, allow transparency in all business
transactions, provide environment where corruption would
certainly fade out. Corporate Governance enables a
corporation to compete more efficiently and prevent fraud
and malpractices within the organization.
Easy Finance from Institutions

Several structural changes like increased role of financial

intermediaries and institutional investors, size of the
enterprises, investment choices available to investors,
increased competition, and increased risk exposure have
made monitoring the use of capital more complex thereby
increasing the need of Good Corporate Governance.
Evidences indicate that well-governed companies receive
higher market valuations. The credit worthiness of a
company can be trusted on the basis of corporate
governance practiced in the company.
Enhancing Enterprise Valuation

Improved management accountability and operational

transparency fulfill investors expectations and confidence
on management and corporations, and in return, increase
the value of corporations.
Reduced Risk of Corporate Crisis and
Scandals

Effective Corporate Governance ensures efficient risk

mitigation system in place. A transparent and accountable
system makes the Board of a company aware of the
majority of the mask risks involved in a particular
strategy, thereby, placing various control systems in place
to facilitate the monitoring of the related issues.
Accountability

Investor relations are essential part of good corporate

governance. Investors directly/ indirectly entrust
management of the company to create enhanced value for
their investment. The company is hence obliged to make
timely disclosures on regular basis to all its shareholders in
Corporate Governance is integral to the existence of the
company. Lesson 3 Conceptual framework of Corporate
Governance 47 order to maintain good investor’s relation.
Good Corporate Governance practices create the
environment whereby Boards cannot ignore their
accountability to these stakeholders.
BENEFITS OF CORPORATE
GOVERNANCE
Good CORPORATE GOVERNANCE can provide the proper
incentives for the board and management to pursue
objectives that are in the interest of the company and
shareholders, as well as facilitate effective monitoring.
Better CORPORATE GOVERNANCE can also provide
Shareholders with greater security on their investment.
Better CORPORATE GOVERNANCE also ensures that
shareholders are sufficiently informed on decisions
concerning fundamental issues like amendments of
statutes or articles of incorporation, sale of assets, etc.

The Benefits to Shareholders

High performance Boards of Directors
Accountable management and strong internal
controls
Increased shareholder engagement
Better managed risk
Effectively monitored and measured performance

Proponents of corporate governance say there’s a direct correlation between

good corporate governance practices and long-term shareholder value. Some
of the key benefits are:
FIVE GOLDEN RULES OF CORPORATE
GOVERNANCE

1. Ethics: Clearly ethical practices applied to the business

2. Align Business Goals: appropriate goals, arrived at through the
creation of a suitable stakeholder participation in decision making
model
3. Strategic management: an effective strategy process which
incorporates stakeholder value
4. Organization: an organization suitably structured to give effect to the
good corporate governance
5. Reporting: reporting systems structured to provide transparency and
accountability.
 CODE OF CORPORATE
GOVERNANCE FOR PUBLICLY
LISTED COMPANIES
SEC Memorandum Circular No. 19
Series of 2016
The Code of Corporate Governance is intended to
raise the corporate governance standards of
Philippine corporations to a level at par with its
regional and global counterparts. The latest
G20/OECD1 Principles of Corporate Governance and
the Association of Southeast Asian Nations
Corporate Governance Scorecard were used as key
reference materials in the drafting of this Code.

INTRODUCTION
The Code will adopt the “comply or explain”
approach. This approach combines voluntary
compliance with mandatory disclosure. Companies
do not have to comply with the Code, but they
must state in their annual corporate governance
reports whether they comply with the Code
provisions, identify any areas of noncompliance,
and explain the reasons for non-compliance.

INTRODUCTION
The Code is arranged as follows: Principles,
Recommendations and Explanations. The Principles
can be considered as high-level statements of
corporate governance good practice, and are
applicable to all companies.

INTRODUCTION
The Recommendations are objective criteria that are intended to
identify the specific features of corporate governance good practice
that are recommended for companies operating according to the
Code. Alternatives to a Recommendation may be justified in
particular circumstances if good governance can be achieved by
other means. When a Recommendation is not complied with, the
company must disclose and describe this non-compliance, and
explain how the overall Principle is being achieved. The alternative
should be consistent with the overall Principle. Descriptions and
explanations should be written in plain language and in a clear,
complete, objective and precise manner, so that shareholders and
other stakeholders can assess the company's governance framework.

INTRODUCTION
The Explanations strive to provide companies with additional
information on the recommended best practice.

This Code does not, in any way, prescribe a “one size fits all”
framework. It is designed to allow boards some flexibility in
establishing their corporate governance arrangements. Larger
companies and financial institutions would generally be expected to
follow most of the Code’s provisions. Smaller companies may decide
that the costs of some of the provisions outweigh the benefits, or
are less relevant in their case. Hence, the Principle of
Proportionality is considered in the application of its provisions.

INTRODUCTION
The Code of Corporate Governance for publicly
listed companies is the first of a series of Codes
that is intended to cover all types of corporations
in the Philippines under supervision of the
Securities and Exchange Commission (SEC).

INTRODUCTION
DEFINITION OF TERMS
Corporate Governance – the system of stewardship and control to
guide organizations in fulfilling their long-term economic, moral,
legal and social obligations towards their stakeholders.

Corporate governance is a system of direction, feedback and control

using regulations, performance standards and ethical guidelines to
hold the Board and senior management accountable for ensuring
ethical behavior – reconciling longterm customer satisfaction with
shareholder value – to the benefit of all stakeholders and society.

Its purpose is to maximize the organization’s long-term success,

creating sustainable value for its shareholders, stakeholders and the
nation.

INTRODUCTION
Board of Directors – the governing body elected by
the stockholders that exercises the corporate
powers of a corporation, conducts all its business
and controls its properties.

INTRODUCTION
Management – a group of executives given the
authority by the Board of Directors to implement
the policies it has laid down in the conduct of the
business of the corporation.

INTRODUCTION
Independent director – a person who is
independent of management and the controlling
shareholder, and is free from any business or other
relationship which could, or could reasonably be
perceived to, materially interfere with his exercise
of independent judgment in carrying out his
responsibilities as a director.

INTRODUCTION
Executive director – a director who has executive
responsibility of day-to-day operations of a part or
the whole of the organization.

INTRODUCTION
Non-executive director – a director who has no
executive responsibility and does not perform any
work related to the operations of the corporation.

INTRODUCTION
Conglomerate – a group of corporations that has
diversified business activities in varied industries,
whereby the operations of such businesses are
controlled and managed by a parent corporate
entity.

INTRODUCTION
Internal control – a process designed and effected by the
board of directors, senior management, and all levels of
personnel to provide reasonable assurance on the
achievement of objectives through efficient and effective
operations; reliable, complete and timely financial and
management information; and compliance with applicable
laws, regulations, and the organization’s policies and
procedures.

INTRODUCTION
Enterprise Risk Management – a process, effected by an
entity’s Board of Directors, management and other
personnel, applied in strategy setting and across the
enterprise that is designed to identify potential events
that may affect the entity, manage risks to be within its
risk appetite, and provide reasonable assurance regarding
the achievement of entity objectives.

INTRODUCTION
Related Party – shall cover the company’s subsidiaries, as well as
affiliates and any party (including their subsidiaries, affiliates and
special purpose entities), that the company exerts direct or indirect
control over or that exerts direct or indirect control over the
company; the company’s directors; officers; shareholders and
related interests (DOSRI), and their close family members, as well
as corresponding persons in affiliated companies. This shall also
include such other person or juridical entity whose interest may
pose a potential conflict with the interest of the company.

INTRODUCTION
Related Party Transactions – a transfer of resources, services or
obligations between a reporting entity and a related party,
regardless of whether a price is charged. It should be interpreted
broadly to include not only transactions that are entered into with
related parties, but also outstanding transactions that are entered
into with an unrelated party that subsequently becomes a related
party.

INTRODUCTION
Stakeholders – any individual, organization or society at large who
can either affect and/or be affected by the company’s strategies,
policies, business decisions and operations, in general. This
includes, among others, customers, creditors, employees, suppliers,
investors, as well as the government and community in which it
operates.

INTRODUCTION
THE BOARD’S GOVERNANCE
RESPONSIBILITIES
 Principle 1

The company should be headed by a competent, working

board to foster the long-term success of the corporation,
and to sustain its competitiveness and profitability in a
manner consistent with its corporate objectives and the
long term best interests of its shareholders and other
stakeholders.
 Principle 2

The fiduciary roles, responsibilities and accountabilities of

the Board as provided under the law, the company’s
articles and by-laws, and other legal pronouncements and
guidelines should be clearly made known to all directors as
well as to stockholders and other stakeholders.
 Principle 3

Board committees should be set up to the extent possible

to support the effective performance of the Board’s
functions, particularly with respect to audit, risk
management, related party transactions, and other key
corporate governance concerns, such as nomination and
remuneration. The composition, functions and
responsibilities of all committees established should be
contained in a publicly available Committee Charter.
 Principle 4

To show full commitment to the company, the directors

should devote the time and attention necessary to
properly and effectively perform their duties and
responsibilities, including sufficient time to be familiar
with the corporation’s business.
 Principle 5

The Board should endeavor to exercise objective and

independent judgment on all corporate affairs.
 Principle 6

The best measure of the Board’s effectiveness is through

an assessment process. The Board should regularly carry
out evaluations to appraise its performance as a body, and
assess whether it possesses the right mix of backgrounds
and competencies.
 Principle 7

Members of the Board are duty-bound to apply high ethical

standards, taking into account the interests of all
stakeholders.
DISCLOSURE AND
TRANSPARENCY
 Principle 8

The company should establish corporate disclosure policies

and procedures that are practical and in accordance with
best practices and regulatory expectations.
 Principle 9

The company should establish standards for the

appropriate selection of an external auditor, and exercise
effective oversight of the same to strengthen the external
auditor’s independence and enhance audit quality.
 Principle 10

The company should ensure that material and reportable

non-financial and sustainability issues are disclosed.
 Principle 11

The company should maintain a comprehensive and cost-

efficient communication channel for disseminating
relevant information. This channel is crucial for informed
decision-making by investors, stakeholders and other
interested users.
INTERNAL CONTROL SYSTEM AND
RISK MANAGEMENT FRAMEWORK
 Principle 12

To ensure the integrity, transparency and proper

governance in the conduct of its affairs, the company
should have a strong and effective internal control system
and enterprise risk management framework.
 CULTIVATING A SYNERGIC
RELATIONSHIP WITH SHAREHOLDERS
 Principle 13

The company should treat all shareholders fairly and

equitably, and also recognize, protect and facilitate the
exercise of their rights.
DUTIES TO STAKEHOLDERS
 Principle 14

The rights of stakeholders established by law, by

contractual relations and through voluntary commitments
must be respected. Where stakeholders’ rights and/or
interests are at stake, stakeholders should have the
opportunity to obtain prompt effective redress for the
violation of their rights.
 Principle 15

A mechanism for employee participation should be

developed to create a symbiotic environment, realize the
company’s goals and participate in its corporate
governance processes.
 Principle 16

The company should be socially responsible in all its

dealings with the communities where it operates. It should
ensure that its interactions serve its environment and
stakeholders in a positive and progressive manner that is
fully supportive of its comprehensive and balanced
development.
 “A ‘no’ uttered from deepest conviction is better
and greater than a ‘yes’ merely uttered to please, or
what is worse, to avoid trouble.” – and “You must
be the change you wish to see in the world .”

– Mahatma Gandhi -
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